Sadashivan Nair's response was typical of gold buyers in the weeks before the Goods and Services Tax (GST) was implemented from last July 1. The retired schoolteacher in Chengannur, a small town in central Kerala, had fixed his daughter's wedding for the first week of September. In the weeks before the wedding, he intended to sell some 50 sovereigns (about 400 gm) of old gold jewellery his family had, and adding some more funds to the sale proceeds, buy 70 sovereigns of fashionable new jewellery for her.

His regular jeweller, however, warned him about this scourge called GST that was in the offing, claiming that once it came into force, Nair would have to pay 3 per cent GST on the old jewellery he sold and another 3 per cent on the new jewellery he bought. Nair promptly advanced his plans and, borrowing hastily from friends and relatives, completed all his transactions two days before GST kicked in.

In fact, no GST has been imposed on the sale of old jewellery, while the increased tax on gold purchases is only 1.5 per cent. "Earlier, there was value-added tax (VAT) of one to 1.5 per cent," says T.S. Kalyanaraman, Chairman and Managing Director, Kalyan Jewellers. "That has been replaced by GST at 3 per cent." No doubt, for gold bought through legal channels, there is also 10 per cent import duty in place since 2013. But like Nair, many others also succumbed to the rumour that gold prices would soar once GST came in, and bought in large quantities before the July 1 deadline.

2016 was a slump year for gold in India, with sales plummeting to their lowest in seven years. The jewellers' strike of March-April, alongside the government's continuing efforts to unearth undeclared income, kept sentiment dampened for most of the year. November saw a huge spike, but hardly for the right reasons - demonetisation had those with unaccounted cash scrambling for ways to rid themselves of their old currency notes and gold in exchange became a preferred option. Yet despite the increase, overall sales of 2015 remained underwhelming.

The first half of 2017, however, saw a dramatic change. Demand for gold rose 28.6 per cent by value to Rs43,600 crore, and 30 per cent by volume to 298.4 tonne, compared to the first half of 2016, according to Delhi-headquartered World Gold Council data. Even more impressive has been the April to June quarter rise, as the July 1 deadline drew closer - value growth was 36 per cent over the same quarter the previous year, with volume growth at 41 per cent. The Akshaya Thritiya festival in April this year, during which Hindus traditionally buy gold, saw a 30 per cent rise in sales. Investment in gold bars and coins in the quarter also grew by 21 per cent.

Some experts ascribe other reasons as well. "Positive sentiment returned as cash supply was restored after the disruption of demonetisation, as well as with the expectation of a good monsoon," says P.R. Soma- sundaram, MD, WGC. "Demand was also supported by a relatively higher number of auspicious wedding days during the quarter."

Impact of GST

The implementation of GST is expected to have two diametrically opposite effects on the gold trade. As is well known, much gold changes hands through unofficial channels - only 30 per cent of the trade is organised. Thus on the one hand, GST implementation is expected to benefit the organised segment by introducing greater transparency and accountability. "GST gives an advantage to gold jewellers," says Mukesh Mehta, President, India Bullion and Jewellers Association (IBJA). "The VAT they paid on purchases earlier was not refundable. But now, with GST, they can get input credit for their inter-state business."

The GST regime will also pressure many in the unorganised sector to move into the organised. Straddling both worlds - buying some smuggled gold and some legitimate, selling some items with proper receipts but many without - as many jewellery makers and traders do at present, will become extremely tough. "The GST framework requires businesses to report every transaction if the benefit of input credit is to be claimed," says Kalyanaraman of Kalyan Jewellers. "Without input credit, business is not likely to be viable. In this scenario, the unorganised segment is likely to find it very difficult to operate."

Photo: Mandar Deodhar

But on the other, it may also prompt some jewellers to move entirely into the unorganised area, buying cheaper smuggled gold and selling without any bills. India's gold import is estimated at 700-800 tonne annually, of which around 30 per cent is smuggled, mostly from Dubai. With the coming of GST, the difference in price will be a substantial 13 per cent, which in turn may lead to a spurt in smuggling. "The government should now think of reducing the import duty from 10 to 6 per cent, as it was in the past, which would make smuggling of gold unprofitable," says Surendran Koduvally, Secretary, All Kerala Gold and Silver Merchants Association.

Gold Loan Companies

How has GST affect the gold loan business, as distinct from the gold trade? Opinions differ. "GST hasn't impacted the gold loan business because the processing fee it lays down is minimal," says Oommen K. Mammen, Chief Financial Officer, Muthoot Finance, the largest gold loan company in the country. But smaller gold loan dealer Gigimon Ummachan of Vithayathil Enterprises, in Varapuzha village near Kochi, feels differently. "Very little disbursements are happening despite there being a demand as there are now restrictions of distributing cash above Rs20,000," he says.

The big gold loan companies are thriving. Muthoot Finance's gold loans under management rose 8 per cent in the April to June quarter this year to Rs27,775 crore over the corresponding quarter the previous year. Muthoot saw a record 30 per cent growth in net profit in the second quarter, reaching Rs351 crore against Rs270 crore in the same quarter a year ago. Its main competitor, Manap- puram Finance is also going strong, having disbursed gold loans of Rs11,124 crore in 2016/17 against Rs10,080 crore in 2015/16. In the first quarter this year, it had consolidated revenues of Rs854 crore, a 13.86 per cent increase over the same quarter in 2016/17, though net profit was marginally lower at Rs155 crore, a 3.72 per cent drop from the same period the previous year.

Future Worries

Not many analysts expect the gold boom to last. "GST in India will be a game changer in the long run; however, short-term distortions towards the complexity of the tax structure will lead to slow demand for gold in the near-term,' says a recent Angel Commodities research report by Prathamesh Mallya and Anuj Gupta. To combat smuggling, some gold importers are looking to getting the precious metal from countries such as South Korea, with which India has free trade agreements, which will obviate the 10 per cent duty. Meanwhile, Roopali Golecha, a retail gold jewellery merchant in Mumbai, says that the only worry for the small players is economic volatility rather than GST. "Around 90 per cent of my buyers have moved to digital payments," she adds.@pb_pbjayan